By Vuru
There’s no doubt that with the IPO of LinkedIn (LNKD) we’re officially heading towards a tech bubble. How big of a bubble is a question that has yet to be answered.
On its first day of trading, LNKD rocketed from its list price of $45 to just over $122 and has more recently settled on an eye-popping price of ~$95 per share. This gives it a market cap of around $9B.
LinkedIn has been around for 9 years and it’s only managed to eek out a profit of $15 million for 2010. That’s a pretty measly profit for a company with a $9 billion market cap.
Many of LinkedIn’s proponents on Wall Street say it has “value that has yet to be unlocked”. It’s funny because the correct spelling of that phrase is actually “s-n-a-k-e-o-i-l”.
LNKD currently has a P/E of 600. It needs to unlock an unbelievable amount of value to be able to justify its current valuation.
But, hey, these tech companies are investing for their future so let’s give them a break and deal with them based on their revenue.
LinkedIn has revenue just north of $240 million (see here). Its one year younger equivalent, Facebook, has billions in revenue. Billions with a capital ‘B’ (see here). If LinkedIn actually had significant value to unlock, wouldn’t it have started doing so by now?
Mr. Market is drunk off the (spiked) Kool-aid and we believe he won’t sober up anytime soon. Zynga, Groupon, and Facebook will probably IPO in the coming year (see here) and it’s hard to picture Mr. Market’s “enthusiasm” decreasing any time soon.
It’s this lack of sobriety that makes us inclined to say there’s a bubble going on here. It’s just a matter of how big it will be.
Large bubbles have three hallmarks:
- Hyperinflated Prices
- Investments by Ignorant Consumers Funded Largely by Debt
- Widespread Faith in Increasing Returns
We certainly have the hyperinflated prices. Those exist not only with LinkedIn and on the secondary markets, but also with companies like Salesforce (CRM) and Netflix (NFLX), which have been trading at substantial valuations. Find the full report on these stocks here: Vuru’s Report on CRM & Vuru’s Report on NFLX.
There’s faith in increasing returns, but it’s probably not widespread yet. There are enough people suggesting we might be heading for bubble country (see here and here).
If tech companies, other than those mentioned above, start lining up one after the other to IPO, we’re probably heading for a large bubble. It’s then that we think the truly ignorant consumers will invest, hoping to profit just as so many will have done.
Verdict
These technology companies are certainly trading at frothy valuations and are likely continue to do so for the near future. As a result, we believe there’s a bubble here.
However, it’s too early to tell if we’re encountering a truly significant bubble that could take down the economy, like the dot-com bubble.
Unfortunately, only time will tell.
